The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto, and other financial information included
elsewhere in this Annual Report on Form 10-K. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contains descriptions
of our expectations regarding future trends affecting our business. The
following discussion sets forth certain factors we believe could cause actual
results to differ materially from those contemplated by the forward-looking
statements.
Overview
We have been a developer and manufacturer of advanced optical instruments since
1982. Our medical instrumentation line includes traditional endoscopes and
endocouplers as well as other custom imaging and illumination products for use
in minimally invasive surgical procedures. Much of our recent development
efforts have been targeted at the development of next generation endoscopes. We
selectively execute internal research and development programs to develop next
generation capabilities for designing and manufacturing 3D endoscopes and very
small Microprecision™ lenses, anticipating future requirements as the surgical
community continues to demand smaller and more enhanced imaging systems for
minimally invasive surgery.
As Ross Optical Industries of El Paso, Texas we also operate as a supplier of
custom optical components and assemblies for military and defense, medical and
various other industrial applications. All products sold by us under the Ross
Optical name include a custom or catalog optic, which is sourced through our
extensive domestic and worldwide network of optical fabrication companies. Most
systems make use of optical lenses, prisms, mirrors and windows and range from
individual optical components to complex mechano-optical assemblies. Products
often include thin film optical coatings that are applied using our in-house
coating department.
As Lighthouse Imaging of Windham, Maine we also operate as a manufacturer of
advanced optical imaging systems and accessories. We have a strong expertise in
electrical engineering and development of end-to-end medical visualization
devices. Product development competencies at Lighthouse Imaging include Systems,
Optical, Mechanical, Electrical and Process Development Engineering. Our product
development team has extensive experience developing visualization systems that
are used in a variety of clinical applications. Lighthouse Imaging is an
industry leader in chip on tip visualization systems.
Approximately 34% of our business during the fiscal year ended June 30, 2022 is
from engineering services primarily relating to the design of medical device
optical assemblies, 41% from the sale of both internally manufactured and
purchased optical components, and 25% from the manufacture of optical assemblies
and sub-assemblies primarily for medical device instrument applications. Our
proprietary medical instrumentation line, unique custom design and manufacturing
capabilities, and expert electrical engineering and development has generated
traditional proprietary endoscopes and endocouplers as well as other custom
imaging and illumination products for our customers' use in minimally invasive
surgical procedures. We design and manufacture 3D endoscopes and very small
Microprecision lenses, assemblies and complete medical devices to meet the
surgical community's continuing demand for smaller, disposable, and more
enhanced imaging systems for minimally invasive surgery.
We are registered to the ISO 9001:2015 and ISO 13485:2016 Quality Standards and
comply with the FDA Good Manufacturing Practices and the European Union Medical
Device Directive for CE marking of our medical products.
Our internet websites are www.poci.com, www.rossoptical.com, and
www.lighthouseoptics.com. Information on our websites is not intended to be
integrated into this report. Investors and others should note that we announce
material financial information using our company websites (www.poci.com;
www.rossoptical.com; www.lighthouseoptics.com), our investor relations website,
SEC filings, press releases, public conference calls and webcasts. Information
about Precision Optics, our business, and our results of operations may also be
announced by social media posts on our Ross Optical and Lighthouse LinkedIn
pages (www.linkedin.com/company/ross-optical-industries/)
(https://www.linkedin.com/company/lighthouse-imaging-corporation/) and Twitter
feed (http://twitter.com/rossoptical) and on our Lighthouse Facebook page
(https://www.facebook.com/lighthouseoptics/).
The information that we post on these social media channels could be deemed to
be material information. Therefore, we encourage investors, the media, and
others interested in Precision Optics to review the information that we post on
these social media channels. These social media channels may be updated from
time to time on Precision Optics investor relations website. The information on,
or accessible through, our websites and social media channels is not
incorporated by reference in this Annual Report on Form 10-K.
16
The markets in which we do business are highly competitive and include both
foreign and domestic competitors. Many of our competitors are larger and have
substantially greater resources than we do. Furthermore, other domestic or
foreign companies, some with greater financial resources than we have, may seek
to produce products or services that compete with ours. We routinely outsource
specialized production efforts as required to obtain the most cost-effective
production. Over the years we have achieved extensive experience collaborating
with other optical specialists worldwide.
We believe that our future success depends to a large degree on our ability to
develop new optical products and services to enhance the performance
characteristics and methods of manufacture of existing products. Accordingly, we
expect to continue to seek and obtain product-related design and development
contracts with customers and to selectively invest our own funds on research and
development, particularly in the areas of Microprecision optics, micro medical
cameras, illumination, single-use endoscopes and 3D endoscopes.
Current sales and marketing activities are intended to broaden awareness of the
benefits of our new technology platforms and our successful application of these
new technologies to medical device projects requiring surgery-grade
visualization from sub-millimeter sized devices and 3D endoscopy, including
single-use products and assemblies. We market directly to established medical
device companies primarily in the United States that we believe could benefit
from our advanced endoscopy visualization systems. Through this direct
marketing, referrals, attendance at trade shows and a presence in online
professional association websites, we have expanded our on-going pipeline of
projects to significant medical device companies as well as well-funded emerging
technology companies. We expect our customer pipeline to continue to expand as
development projects transition to production orders and new customer projects
enter the development phase. Our Ross Optical division markets through existing
customers and trade shows, in addition to proactive online marketing strategies
executed primarily through its website.
Critical Accounting Policies and Estimates
Our critical accounting policies are included in the Notes to our Financial
Statements contained in this Annual Report on Form 10-K.
Results of Operations for the Fiscal Year Ended June 30, 2022 as Compared to the
Fiscal Year Ended June 30, 2021
Total revenues for the fiscal year ended June 30, 2022 were $15,678,248, as
compared to $10,674,907 for the same period in the prior year, an increase of
$5,003,341, or 46.9%, primarily due to inclusion of the Lighthouse division
since its acquisition on October 4, 2021. Excluding the effect of the Lighthouse
acquisition, assembly production revenue increased approximately $801,000 in
fiscal year 2021 compared to fiscal year 2020, optical component revenue
increased approximately $731,000 while engineering revenue decreased
approximately $404,000, and optical component revenues were virtually unchanged
during the same period. The increases in assembly production revenue were driven
primarily by a large reorder from a large medical device company for a spinal
surgery application, while the increases in optical components were largely
driven by a large order from a large defense/aerospace customer. Decreases in
the engineering revenue year over year are primarily due to timing of certain
programs while the pipeline for these revenue sources remains strong.
Our largest customer during the fiscal year ended June 30, 2022 accounted for
9.4% of our revenue and represented manufacturing assembly revenues for a
medical diagnostic system. We generated revenues from 377 unique customers
during the year ended June 30, 2022, and no single customer accounted for 10% or
more of our revenue for the fiscal years ended June 30, 2022, or 2021.
The COVID-19 world-wide pandemic that began during the quarter ended March 31,
2020 and the domestic and international impact of policy decisions being made in
major countries around the world has had, and could continue to have, an adverse
impact on our sources of supply, current and future orders from our customers,
collection of amounts owed to us from our customers, our internal operating
procedures, and our overall financial condition. Given the uncertainty
surrounding the continuation of economic impacts both domestically and abroad,
we cannot predict with certainty at this time what the future impact of COVID-19
and resulting business and economic policies in the US and abroad will be on our
up-coming quarterly fiscal operating results.
17
Gross profit for fiscal year ended June 30, 2022 of $4,928,187, reflected an
increase of $1,494,602, or 43.5%, as compared to gross profit for fiscal year
2021 of $3,433,585, and was principally the result of inclusion of the
Lighthouse division since its acquisition in October 2021. Gross profit, as a
percentage of revenues for fiscal year 2022, was 31.4% as compared to gross
profit, as a percentage of revenues for fiscal year 2021, of 32.2%. Gross profit
and gross profit percentage for any given fiscal period depend on a number of
factors, including overall sales volume, facility utilization, product sales
mix, the nature and costs of engineering services, design challenges and
changes, production start-up costs, customer-imposed project changes or delays,
and the effects of COVID-19 pandemic policy decisions on various economies and
our suppliers and customers, as well as the effects on production efficiencies
due to the augmented policies we have incorporated into our operations as a
result of the COVID-19 pandemic.
Our decrease in gross margin from 32.2% to 31.4% during the fiscal year ended
June 30, 2022 compared to 2021 was primarily the result of a gross margin
decrease in one engineering project due to cost over-runs, lower than target
margins on manufacturing programs at our Lighthouse division due to slower than
expected transfer of projects from engineering to production and a lower
realized margin on a large volume recurring component product produced for a
catalog reselling customer. The remainder of our production, engineering and
component revenues resulted in margins within our targeted range with reasonably
expected fluctuations.
Research and development expenses were $666,479 for fiscal year 2022 as compared
to $624,253 for fiscal year 2021. The increase of $42,226, or 6.8%, in fiscal
year 2022 compared to fiscal year 2021 is considered to be a customary change
resulting from the normal course of business and reflects a similar level of
engineering related development projects in fiscal year 2022 compared to 2021.
We believe research and development activities enhance our technology platform
of capabilities and our overall competitiveness in providing unique optical and
illumination solutions for medical device endoscopes.
Selling, general and administrative expenses were $5,613,473 for the fiscal year
ended June 30, 2022, compared to $3,714,915 for the same period in the prior
year, an increase of $1,898,558, or 51.1%. The increase in selling, general and
administrative expenses in the year ended June 30, 2022 was primarily due to
inclusion of the Lighthouse division since its acquisition in October 2021, plus
increased stock based compensation and marketing related expenses as well as
additions to our administrative team due to the growth of the overall
organization.
The income tax provisions in fiscal years 2022 and 2021 represent the minimum
statutory state income tax liability.
Liquidity and Capital Resources
We have sustained recurring net losses for several years. During the years ended
June 30, 2022 and 2021 we incurred operating losses of $1,513,890 and $905,583,
respectively. At June 30, 2022, our cash and cash equivalents were $605,749,
accounts receivable were $2,663,872, and current liabilities were $4,586,641,
including $905,113 of advances paid against open purchase orders by our
customers.
Although our revenue and gross margin have increased due to new business from
our acquisition of Lighthouse Imaging, our operating expenses have also
increased, and we continue to experience pricing pressure from our customers and
challenges in engineering projects and production orders that can result in cost
over-runs and depressed gross margins. We also continue to experience added
uncertainty related to our vendors ability to supply materials and our customers
future order levels as a result of the economic impact the COVID-19 world-wide
pandemic and related jurisdictional policies and regulations and lingering
supply-chain issues. Consequently, critical to our ability to maintain our
financial condition is achieving and maintaining a level of quarterly revenues
that generate break even or better financial performance as well as timely
collection of accounts receivable from our customers. We believe profitable
operating results can be achieved through a combination of sales growth,
realized gross margins and controlling operating expense increases, all of which
are subject to periodic fluctuations resulting from sales mix and the stage of
completion of varying engineering service projects as they progress towards and
into production level revenues.
We have traditionally funded working capital needs through product sales,
management of working capital components of our business, cash received from
public and private offerings of our common stock, warrants to purchase shares of
our common stock or convertible notes, manufacturing equipment leases, and by
customer advances paid against purchase orders by our customers and recorded in
the current liabilities section of the accompanying financial statements. We
have incurred year to year and quarter to quarter operating losses during our
efforts to develop current products including Microprecision optical elements,
micro medical camera assemblies and 3D endoscopes. Our management believes that
the opportunities represented by these technical capabilities and related
products have the potential to generate sales increases to achieve breakeven and
profitable results.
18
On October 4, 2021 we acquired the assets of Lighthouse Imaging, LLC as
described in note 2. Business Acquisition to the accompanying financial
statements in this Form 10-K. To finance the cash portion of the acquisition
price we entered into a $2,600,000 bank term loan, sold shares of our common
stock for gross proceeds of $1,500,000. We also secured a $250,000 bank line of
credit from the same bank for working capital needs, upon which no borrowings
were outstanding as of June 30, 2022.
Capital equipment expenditures during fiscal year 2022 and fiscal year 2021 were
$113,197 and $237,900, respectively, $161,976 of which in fiscal year 2021, was
funded by leasing agreements with monthly payment obligations. Patent
application expenditures during fiscal year 2022 and fiscal year 2021 were
$39,543 and $46,473, respectively. The level of future capital equipment and
patent expenditures will depend on future sales and success of on-going research
and development efforts.
Contractual cash commitments for the fiscal years subsequent to June 30, 2022,
are summarized as follows:
Fiscal 2023 Thereafter Total
Capital lease for equipment, including
interest $ 48,619 $ 120,542 $ 169,161
Minimum operating lease payments $ 181,556 $ 377,904 $ 559,460
We have contractual cash commitments related to open purchase orders as of June
30, 2022 of approximately $1,557,582.
Material Trends and Uncertainties
We currently have no material trends or uncertainties that have or are
reasonably likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
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